TSP Talk Blog

Stocks soared on Wednesday as the Dow gained 619-points, which is the 3rd largest point gain ever. But as usual, the only way you get a point gain like that is to follow some big losses. So if you got were lucky enough to get those gains yesterday, you have probably been taking a beating up that point. If you missed the gains yesterday, you were probably lucky (or good) enough to miss the downside carnage. There may be a few of the very fortunate people out there who missed the downside and bought in the last day or two. To you, congratulations! That's not very easy to do.

I just heard that major league hedge fund manager / activist Bill Ackman sent an investor letter to his clients this week telling them his fund has posted a loss for the year, so if you're down for the year at this point, you're not in bad company. Given the market's 2015 returns it's not much of a surprise, and believe me, he's not the only fund manager down this year. He may actually be one of the better performing funds from what I hear. Some have been getting clobbered.

Daily TSP Funds Return More returns

The C-fund led, the I-fund had a little payback from Tuesday's price, and bonds were down.

So why did the market fall so much, and why did rally so strongly? It's not really rocket science. It happens almost every time that volatility soars. When people start to lose money and they are using margin in their accounts, their losses are magnified and they start to get margin calls and are forced to sell by their brokerages.

Once that exhausts itself, you get some stabilization and those who were short the market (betting against it) start to cover their short positions, which you do by buying back your short positions. When the market starts to move to the upside, those shorts are getting hurt and they may start getting margin calls, their brokerages force them to buy [to cover], and the buying accelerates. And that's why the action is so volatile. Unfortunately, this may repeat itself once the panic buying is exhausted - and yes, yesterday's action was panic buying.

The SPY (S&P 500 / C-fund) posted another positive reversal day, and tends to precede a rally the following day - at least at the start of the day. You probably didn't forget Monday's positive reversal day that saw a pop to the upside on Tuesday, but we got a late major sell-off into the close. So, barring any major news event overnight, look for some gains early on Thursday, but where it closes is anybody's guess.


Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk

The Dow Completion Index (S-Fund) is still lagging but for those with short-term timing frames, we could see those overhead gaps get filled, even if the gains don't hold for very long. The chart is broken and it's more likely that we won't get a "V" bottom, but rather a lot more volatility between 990 and 1080.


Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk

Let's revisit something we talked about almost a year ago. The Nasdaq rocketing off the October lows opened up a few gaps along the way. As you probably know, I am a big believer in gaps getting filled. Most get filled sooner rather than later, but they all seem to eventually be filled. One good piece of evidence that the worst may be over for the market is that all three of those gaps that we've had in our rearview mirror for almost a year, have now been filled. The only gaps left are above the current levels (shown in blue.)


Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk

The EFA (EAFE Index / I-fund) had a big day but I wanted to post a longer-term chart to show that there may have been some strong support holding at last year's lows this week. Sure, it could go lower, but it's now three times that buyers stepped up near the 57 level.


Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk

This chart of the S&P 500 from 2011 shows a couple of ways how this can play out. In March of 2011 you saw a classic "V" bottom. Unfortunately, the current action is closer to what we saw in August of 2011, which means we're more likely to get a choppy, very volatile bottom. Those swings that summer were huge, up to 8%, 10%, 12%, and higher, but because we can only buy once per month in our TSP accounts, it may be impossible to play it perfectly. There's opportunities there, but also opportunities to be on wrong side of the swings so be careful.


Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk

The AGG (bonds / F-fund) was down sharply again and we may have seen a breakdown from the rising wedge. It's also back below the 50-day EMA.


Chart provided courtesy of www.stockcharts.com, analysis by TSP Talk


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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley


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